Discover Charge-Offs Improve and Debit Volumes Grow as Consumers Are ‘Stable’

Discover Financial Services posted first-quarter earnings results Thursday (April 24) that showed improving credit metrics, increased debit spending and higher deposits, ahead of its pending acquisition by Capital One.

An earnings presentation showed that increased debit spending helped drive PULSE network volumes up 3% in the period, to $81.3 billion.

During a conference call with analysts, which included no Q&A and no guidance due to the merger, Interim CEO Michael Shepherd said the tie-up with Capital One “will increase competition in payment networks, offer a wider range of products to our customers [and] increase the resources devoted to innovation and security.”

The comments echoed sentiments from Capital One earlier this week. CEO Richard Fairbank said that upon closing next month, the deal will forge a “leading consumer banking and payments platform” that will come as “Discover brings us a growth platform both on the network side and with respect to their card franchise that allows us to preserve the best of what they do and leverage a lot of Capital One’s capabilities.”

Discover shares were up 4.9% Thursday.

Shepherd took note of the “good credit performance” and said on the call that “Discover customer behavior was stable, evidenced by spend, payment and credit trends.”

Within the card segment, the 30+ day delinquency rate was down by 0.18% compared to the fourth quarter of last year, according to the presentation. The same credit metric was 0.17% better than the first quarter of 2024.

“Consequently, our acquisition and underwriting strategies did not change materially during the quarter,” Shepherd said during the call. “In light of increasing macroeconomic uncertainty, we are closely monitoring economic developments and consumer health.”

Chief Financial Officer John Greene said on the call that, alongside the credit performance, Discover’s provision expense — where reserves are taken to cover anticipated loan losses — declined by $253 million. Like other firms, Discover’s card receivables were relatively stable, down quarter on quarter as payment rates were up.

The ending loan balances in the card business were $99 billion, off from $102.8 billion in the fourth quarter of last year, and down from $99.5 billion in the first quarter of 2024, per the presentation.

“Discover card sales were down 2% compared to the prior year,” Greene said.

The sales volume in the most recent quarter was $49.3 billion, according to the presentation.

“The decline in card sales was from past credit tightening actions,” Greene said during the call. “Personal loan balances were flat. Although demand remains robust, our conservative underwriting posture and increased competition has slowed the pace of new originations.”

The company’s personal loans on the books were at $10.1 billion, with net charge-offs at 4.21%, down three basis points from the end of last year, and up 0.19% from the year-ago period, per the presentation. Loan charge-offs were within expectations.

Average consumer deposits were up 6% year over year and 1% sequentially, the presentation showed.

“We grew direct-to-consumer deposit balance by $2 billion in the quarter while reducing average deposit rates by 22 basis points,” Greene said during the call. “Direct-to-consumer deposits now account for 74% of total funding.”

The slowdown in Discover card sales led to $51 billion in payments volumes, according to the presentation. The Diners Club segment demonstrated robust growth, as volumes were $12 billion, up 18% year over year. Diners Club growth was driven in India and Israel.

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